In developed markets, passive fund management has garnered significance since 2016. This phenomenon took place when the returns generated by actively managed funds struggled to beat the returns generated by passively managed funds.
Index funds, as the name suggests, invest in an index. These funds seek to invest in all the underlying securities in the same proportion as that of an index. The objective of an index fund is to replicate the performance of the index. In case of India, the index will be Sensex, Nifty, etcetera.
In emerging markets such as India, index funds have not generated much popularity. However, studies suggest that it is nearly impossible to beat the benchmark index year after year. Thus, it makes sense to diversify investments through index funds.
The success of the index fund is determined by how close it is able to replicate the performance of the underlying index it is copying. This is measured by tracking error. Thus, the lower tracking error indicates that the fund is better.
An investor should invest in index funds should they have any reservations with respect to the ability of a fund manager in generating alpha over the benchmark returns. Further, if an investor is looking to play a low-cost strategy, index funds are best suited. Furthermore, index funds are also helpful to remain fully invested in equity at all times. For investing in an index fund, an investor has three options generally:
Two main advantages of index funds are:
1. Lower management expense ratios (expense ratio is typically one-third of the fee for an actively managed fund)
2. Historical outperformance over majority of active funds.
Index funds are generally suited to less sophisticated, and more risk-averse investors. Investors who are seeking to keep things simple, minimize investment cost and who are looking to make reasonable profits from historical trends of the market should ideally opt for index funds.
We recommend the following index funds that have successfully managed to replicate the performance of index to the closest degree.
|Rank within Category||18||24||76||96|
The scheme seeks to generate returns from S&P BSE Sensex, subject to minimizing tracking error. It is more suited for investors who seek to invest in equity covered by Sensex. The fund has generated considerable absolute returns of 15.72% over the one-year period.
The fund has low deviation amongst its peer and has beta close to 1. Krishan Kumar Daga has been managing the fund since October 2015. Prior to joining HDFC AMC, he has worked with Reliance Mutual Fund, Reliance Capital Ltd and other investment management companies. Daga holds a BCom (H) degree.
|Rank within Category||64||59||91||100|
The scheme seeks to track the performance of Nifty 50 Index. The fund has generated healthy absolute returns of 13.67% over the one-year period and has healthy risk profile when compared with the category average. The fund is ranked 2 as on March 31, 2018, by CRISIL in index funds category.
Kayzad Eghlim ably manages the fund since August 2009. Prior to joining ICICI Prudential AMC, he has worked with IDFC Investment Advisors Ltd., Prime Securities, and Canbank Mutual Fund. He holds a B.Com (H) degree and an M.Com degree.
|Rank within Category||87||51||15||32|
The fund seeks to invest in companies that are part of Nifty Next 50 Index and endeavor to achieve the returns in line with the index. The fund has moderate standard deviation amongst and has managed a beta of 1.03 thus replicating index’s performance.
The asset under management (AUM) is less than Rs 500 Crs and thus expense ratio becomes monitorable. Kayzad Eghlim ably manages the fund since August 2009. Prior to joining ICICI Prudential AMC, he has worked with IDFC Investment Advisors Ltd., Prime Securities, and Canbank Mutual Fund. He holds a BCom (H) degree and an M.Com degree.
|Rank within Category||55||48||67||109|
The fund seeks to invest in stocks that are part of Nifty 50 index and to achieve returns that are in line with the index return. The fund is ranked 3rd as on March 31, 2018, by CRISIL in its category of index funds.
The fund has healthy assets under management and comes with a lower risk profile when compared to category average. Kaushik Basu manages the fund since January 2013. Basu is associated with UTI AMC from over a decade now and holds a B.Com (H), CAIIB, ICWA and LLB degree.
Disclaimer: the views expressed here are of the author and do not reflect those of Groww.